Need advice on paying off debt vs using retirement investmts
I have been struggling in the startup world and have been burned pretty bad a couple of times, and now find myself with no savings and about 50k cc debt (various interest levels, some still 0% promo period) as well as about the same amount 50k in various 401k accounts. I just heard from my credit card company they are reducing my line of credit and that my credit score has recently gone down quite a bit. I'm in my 40s and struggling to get back into the type of good paying job I used to have for years. Very worried about this debt. I'm not going to have much extra coming in to start really paying this down anytime soon, i fear.
My question is: is it a safe assumption at this point that I should look into cashing out the retirement investments and get rid of this debt as soon as possible (knowing there are early withdrawal penalties and that I'd have to start building it up again for retirement, way behind). I know its frowned upon but I fear this debt which will grow with interest may be the worse evil of the two.
Anyone kind enough and knowledgeable enough to share their opinion I would receive it gratefully.
Thu Jul 14, 2016 7:08 am
oldguy Senior Member
Cash: $ 716.00
Joined: 21 May 2006
quote: struggling in the startup world and have been burned pretty bad a couple of times, and now find myself with no savings and about 50k cc debt (various interest levels, some still 0% promo period) as well as about the same amount 50k in various 401k accounts.
I know the drill, my kids/nephews are in your generation. Somehow an urban legend got to the Gen X'ers that "working for the Man" cannot work and that only entrepreneurs become wealthy. Turns out the opposite is true, when I go to a retirement lunch, most of the folks around the table are multi-millionaires. Meanwhile, 85% of startups go bk and are stuck with cc debt from the business.
A W2 job has a high probable outcome of wealth (altho much of our populous doesn't accept that.) Eg, a couple/young family w/ W2 Jobs could easily invest $5000/y into 401k's at 11%/y for a 30y working life - and have $1,100,000. Or $10k/y and have $2.2M. Yet very few do it, at the company that I worked for, less than 35% used the 401k plan.
If your income stream can cash-flow your debt, you'll be far ahead by keeping the $50k in the 401k, at 11%/y it will be $1,150,000 in 30y if you can leave it alone, ie, a big part your retirement needs are already in the bag. Conversely, if you cash it out the taxes & penalty will cost about $15,000, so you'll net only $35k.
Thu Jul 14, 2016 4:42 pm
toasterchrome New Poster
Cash: $ 0.45
Joined: 14 Jul 2016
Thank you for insight and recommendation. Makes sense when you put it that way. I'm curious though, where you get the 11%/yr growth? Mine are usually low single digits.
I use the SP500 Index. It is the unmanaged Index of the generic US Market. History has shown that only 15% of the professional fund managers (mutual funds , pension funds, labor union funds, govt worker funds) beat the generic market average. So, instead, I ACCEPT the average instead of trying to beat it.
Look at several 30-year blocks - on average the longterm 30y average is about 11%/y. (The most recent block from 1986 to 2016 averaged 9.88%/y. ) Not one of the best, but a pretty good return anyway, way better than bank interest.
Most of us are given about 30 yrs for wealth-building, then we transition to wealth-preservation. Ie, build you wealth by choosing investments that outpace inflation by a substantial amount - and then, at age 55 or 60, move to investments that merely track/offset inflation to preserve your wealth. As always - risk and return are directly proportional. Take your risks while you are young during your first 30 yrs, and then cut your risk to near zero in retirement.